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A tractable method to measure utility and loss aversion under prospect theory

  • Mohammed AbdellaouiEmail author
  • Han Bleichrodt
  • Olivier L’Haridon
Article

Abstract

This paper provides an efficient method to measure utility under prospect theory. Our method minimizes both the number of elicitations required to measure utility and the cognitive burden for subjects, being based on the elicitation of certainty equivalents for two-outcome prospects. We applied our method in an experiment and were able to replicate the main findings on prospect theory, suggesting that our method measures what it is intended to. Our data confirmed empirically that risk seeking and concave utility can coincide under prospect theory. Utility did not depend on the probability used in the elicitation, which offers support for the validity of prospect theory.

Keywords

Prospect theory Utility measurement Loss aversion 

JEL classification

D81 

Notes

Acknowledgments

Peter Wakker and two anonymous referees provided helpful comments. Mohammed Abdellaoui and Olivier L’Haridon’s research was supported by the French National Research Agency (ANR, Risk Attitude). Han Bleichrodt’s research was supported by a grant from the Netherlands Organization for Scientific Research.

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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  • Mohammed Abdellaoui
    • 1
    Email author
  • Han Bleichrodt
    • 2
  • Olivier L’Haridon
    • 3
  1. 1.HEC-Paris, GREG-HECJouy-en-Josas, ParisFrance
  2. 2.Department of EconomicsErasmus UniversityRotterdamThe Netherlands
  3. 3.GREG-HEC and University Paris Sorbonne, HEC-ParisJouy-en-Josas, ParisFrance

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